Lesson learned from Houston's foreclosure mess?
Lesson learned from Houston's foreclosure mess?
Lenders have always viewed real estate investors with a wary eye. It seems all investors are grouped into flip-and-run speculators with little skin in the game, no plan for maintenance and repair, and yet huge expectations for short-term profits.
Lenders even raise interest rates on investment properties, feeling their risk in the deal should be greater than an owner-occupied property. Because the owner does not live there, it's logical to assume the property will receive less care and attention.
Now, the situation apparently has changed -- at least for investors who want to buy groups of foreclosed properties. In fact, they might even be viewed as saviors.
Recently, the Federal Housing Finance Agency (FHFA), the U.S. Treasury Department and the Department of Housing and Urban Development (HUD) announced they would seek new options for selling single-family real estate owned (REO) properties held by Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA).
"While the enterprises (Fannie and Freddie) will continue to market individual REO properties for sale, FHFA and the enterprises seek input on possible pooling of REO properties in situations where such pooling, combined with private management, may reduce enterprise credit losses and help stabilize neighborhoods and home values," said Edward J. DeMarco, FHFA acting director.
"Partnerships involving enterprise properties may reduce taxpayer losses and meet the enterprises' responsibility to bring stability and liquidity to housing markets. We seek input on these important questions."
For years, at least one investor group has encouraged Fannie and Freddie to allocate funds for the rehabilitation of their foreclosed properties, then set aside another pot of cash to help subsidize the financing. That way, they could self-finance their newly refurbished inventory with low down payments, reduced closing costs and quick turn-around times while removing troubled assets.
That didn't happen. Now, these government-sponsored entities have less cash and a massive REO portfolio.
Five years ago, Tom DiMercurio, a veteran of 37 years in the foreclosure business, was the first to label and predict a "foreclosure tsunami" for several areas of the country. While he says some markets have yet to hit rock bottom, he also believes this is a great time for long-term investors to begin picking up single-family homes for their portfolios.
However, potential buyers must be genuine players and not speculators, and be prepared to do factual research if they are interested in purchasing an additional piece of real estate in a specific area.
"The residential rental market has been very strong because there have been so many foreclosures," DiMercurio said. "But anybody who wants to buy a property in addition to their primary residence really needs to go back to basics. The value of a piece of real estate must be based on the net income it can produce. If it's sustainable with a modest -- yet realistic -- down payment, then it becomes a viable candidate for investment."
The government is looking for approaches that achieve a reduction in foreclosure volume but also for current renters to become homeowners -- and to assist former homeowners with affordable rentals in a cost-effective manner.
There have been examples that have worked. For example, from 1986 to 1988, one-third of all Fannie Mae's national REO inventory was situated in five Houston-area counties. The sheer volume of localized foreclosures and the severity of the absolute value decline rivaled the worst financial performance in U.S. history.
The Houston slump was brought on by a declining oil industry. The resale market for REOs was challenged by a widely held public view that foreclosed homes were surely the result of a building defect or other shortcoming that made them less desirable than a regular (nonforeclosure) residential property.
Working with Fannie Mae in Washington, D.C., a group conceived a plan to brand "Fannie Mae as the Best Housekeeper in Houston," celebrating the like-new condition of restored Fannie Mae-acquired properties.
Offered with below-market, fixed interest rates, a maximum of a 97 percent loan-to-value for owner-occupants, reduced closing costs, 30-day closings, and refurbishment to a like-new condition, Fannie Mae homes were extremely popular in the Houston residential real estate market for several years.
To accelerate the rehabilitation process, Fannie Mae's Houston office operated like a consolidated real estate disposition and construction company. A contractor/builder partner bought carpet, paint and roofing material by the container load directly from the warehouse, reducing the costs of refurbishing the foreclosed homes.
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